Around the Horn: Fixed Income Roundtable with UBS Asset Management
Lead — The fixed income market is facing turning points with considerable uncertainty stemming from both policy shifts and evolving market conditions, as detailed by UBS Asset Management’s recent commentary. Per the full note source, top portfolio managers highlighted the need for adaptability in investment strategies amid fluctuating economic indicators and federal policy shifts. The strategies firms are employing suggest a cautious but strategic approach to navigating these changes, signaling potential volatility ahead. As the dust settles from unprecedented market events, understanding these dynamics will be crucial for positioning going into Q2.
What the desk is arguing
The desk believes the current state of uncertainty in fixed income markets compels institutional traders to reassess their strategies and allocations. According to UBS, the whirlwind of changes reflecting in the markets is a significant factor, underscoring the importance of calibrated responses to evolving financial landscapes.
This environment is catalyzing discussions on effective liquidity management and sector-specific strategies, particularly as portfolio managers from UBS recognized the complexity and necessity for agile planning in their recent roundtable discussions. With various pressures in play, effective positioning in this volatility is paramount for success.
Where it sits in our coverage
Current consensus targets for the fixed income sector suggest a range of 1.04 to 1.10. Targets are set by the following firms: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This reflects a divergence within the market that is crucial for strategists to note, as the desk's assessment aligns closely with jpmorgan at the upper end of the spread, suggesting an optimistic outlook amid current uncertainties.
How other firms see it
jpmorgan and a few others see the potential for modest gains amidst ongoing volatility, while bofa expresses a more cautious stance, indicating a preference for risk aversion in an uncertain environment. This split illustrates a broader debate on how to navigate the fixed income landscape.
Market dynamics seem to be heavily influenced by Fed policy signals and sectoral performances, with liquidity strategies and interest rate trajectories forming pivotal points for analysis in the coming months.
01Institutional traders need to adjust strategies amidst evolving fixed income market conditions.
02There is a growing emphasis on liquidity management as firms navigate volatility.
03Divergence in targets among firms suggests varied outlooks on market recovery.
04Continued federal policy shifts are influencing market strategies and performance.
Market implications
Traders should monitor the upper target of 1.10 established by **jpmorgan**, particularly as any movement toward this threshold may indicate increased confidence in the fixed income space. Additionally, observing liquidity measures and sector performance could provide signals of market resilience or the onset of further volatility.
Risks to this view
A sharper than expected shift in Federal Reserve monetary policy or economic indicators such as inflation data could rapidly alter the landscape, potentially forcing a reevaluation of current strategies. Should inflation re-emerge at higher levels, the anticipated recovery in fixed income may be jeopardized, compelling a pivot to risk-off strategies.
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Welcome back to our ongoing series Around the Horn with UBS Asset Management's Fixed Income Team. I am pleased to welcome this month's featured speakers, top portfolio managers and business heads from AM's Muni Taxable Fixed Income and Liquidity Teams. We'll hear candidly from them on their views on markets and what they believe financial advisors should be focused on within the fixed income space.
Joining us today we have Anthony Liotti, head of the Fixed Income SMA Advisory Group and to serve as our moderator for today. Anthony is joined by Dave Walczak, Senior Portfolio Managers for AM's Liquidity Strategies, Dave Rothweiler, Senior Portfolio Managers for AM's Short Duration and Liquidity Strategies, Dave Vignolo, Head of AM's U.S. Corporate Fixed Income Strategies, Patrick Matiewicz, Portfolio Manager for our U.S.
Multi-Sector SMA, David Michael, Portfolio Manager for Emerging Markets, and Lisa DiPolo, Senior Municipal Bond Portfolio Manager. As I mentioned, Anthony is going to moderate our discussion today, so with that, pass it over to you. Great.
Siobhan, thank you. Appreciate it. We have a very deep lineup once again today, so we'll get right into it.
I'll have some broad-based comments and then turn it over to the PMs to get into their viewpoints. So, clearly, what a dizzying start to the year we've witnessed thus far. I think we can all agree that developing and properly implementing a plan is essential to success, whether it be for a household, a business, an investment portfolio, and even for our, or a federal government.
And yet, in any planning process, we must acknowledge a certain degree of miscalculations, inaccurate assumptions, which may require adjustments or even a complete revamp. And I think right now, that is what many financial advisors and investors are grappling with. The relentless posturing and or rhetoric policy shifts coming out of Washington have clearly had a bit of a profound impact on financial markets, leading many to question whether their investment plans need to be reassessed.
If we just take a step back, we go back as we enter 2025, which was only 10 weeks ago about expectations of American exceptionalism were in full force. We, a strong economy, was seen as the foundation for an equity market where many industry experts had set equity targets of the S&P around 6,500, if not a little bit higher, within fixed income. There was a broad-based assumption that the Federal Reserve would remain on an extended pause throughout the year.
Bonds, which we're here to talk about today, were viewed as an attractive investment, right? It delivered returns primarily through, I would say, coupon carry rather than necessarily significant price appreciation given the expectations for a very range-bound interest rate market, right? And then lastly, you had sort of the two wildcards, inflation and employment, right?
The expectations of tariffs on global trading partners coupled with, I'd say, the potential, which we're seeing now is almost actual, retaliatory measures, has raised concerns that inflation or had raised concerns that inflation could obviously accelerate. However, what we've seen thus far is a bit of the opposite. Interest rates have moved lower, bond prices have risen, which are really just fears of an economic slowdown, which again, the ripple effect of that is it's increased the probability of Fed intervention, which was not on the table to start the year off, really, coupled with a potential recession.
Inflation continues to move in a positive direction. We saw that a bit of witness today by the recent CPI release. Employment continues to remain on solid footing, but we haven't seen the impact of the government job cuts yet to be felt within the data, and we're clear you have to account for that in the coming months.
It's the unknowns, right? It's the policy shifts. It's the economic cross-currents and geopolitical developments that are causing businesses and individuals to pause the decision-making, ultimately weighing on the broad markets.
I think we've said this before, markets, as we all know, hate uncertainty and the lack of clarity. I'll end here a little bit of where I began, which is, is it time to get aggressive with changing or adjusting our fixed income allocations? I say no, not necessarily.
We have long talked about volatility in 2025, given the impact of the second term of the administration's policy agenda. The key question is, how do we frame this period, right? Do we look back and see Washington's actions as reactionary, short-term moves, like a game of chess, or is it, do they provide to be strategic, tactical maneuvers more akin to a game of chess, right?
Not chess, not checkers. With that, I'm going to give the more difficult, challenging part to our PMs to get their views of the market and how we are currently positioned within our portfolios. Let me turn it over to the PM side and start off the call like we always do, with the front end of the curve and Dave Walzak.
Dave, take us away, my friend. Yeah, great. Thanks, Anthony.
Maybe just a few comments on our side first, on the inflation report that we got today. As you rightly pointed out, it did come in lower than expectations, but I think when you look at the details a little bit more, especially in terms of what drove some of the downward or surprise downward movement relative to expectations, it was concentrated in some of the transport categories, like airfares and auto insurance, and importantly, these components do not feed into core PC deflator, which is the Fed's targeted measure for inflation. We're going to get PPI tomorrow, and then we'll ultimately see kind of how the PC deflator ends up at the end of this month.
But you just kind of want to make that point on the inflation side. But yeah, as you also pointed out, Anthony, quite a bit going on, and especially if you're Fed Chair Powell, a lot of things to consider here. But I think one thing that has been consistent amidst all this volatility has actually been the Fed's messaging.
They've continued to stress patience from a policy standpoint. We've heard that from numerous FOMC speakers over the past couple of weeks, most notably Fed Chair Powell last Friday, one of his quotes, which I thought was pretty interesting, saying, as we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry and are well-positioned to wait for greater clarity.
So I think that just highlights kind of where the Fed's at currently, as you look at expectations for their meeting next week, the market's pricing in no change. So I think the market's going to be looking for, obviously, further updates from Fed Chair Powell, if he does have any, beyond his comments late last week. But also, too, crucially, we are going to get an updated dot plot, which I know, at least for us here at the front end, the market tends to pay pretty close attention to.
Just quickly, the last one that we got was at their December meeting that showed two cuts for the course of this year. And then just kind of looking at where Fed Funds users' pricing is today, we're seeing about 71 basis points for the cuts priced in to that curve, with the first full 25 basis points priced for the June meeting. So that's kind of where we stand today from a Fed pricing standpoint.
Just in terms of what we've seen elsewhere, kind of in the front end here, just thinking specifically about the bank funding markets, floaters, we've continued to see good volumes going through there as spreads have continued to tighten. But actually, over the past day or so, we've started to see some floaters cheapen up a little bit. Not a lot.
We're talking maybe one to two basis points, but it does seem like investors are pushing back a little bit in terms of some of the floaters, the floater spreads that we're seeing here within the money market space. But still, we're seeing decent buying going through. Investors seem to be attracted to even just the small slight widening that we're seeing here in the market.
Just looking at assets and money market funds, I know I bring this up on every call, but we kind of hit another all-time high, at least in terms of assets, as measured by the ICI. We actually crossed $7 trillion in AUM and money market fund assets, which is up just under $180 billion on a year-to-day basis. And with that, I'll hand it over to Dave Rothweiler.
Yeah. Thanks so much, Dave. So, as Dave just mentioned, the CPI came in a touch lower than expected, so looking backward, we have a little bit of comfort looking forward.
We have the ongoing uncertainties around the tariffs versus the still-to-be-determined budget, tax policy, regulatory environment, possible peace in Ukraine, and the list goes on. So, lots of uncertainty translates to a lot more vol around rates. So, I'm going to concentrate everything on the front end.
We started the year with yields hitting almost 4.4%, and we rallied down to 3.90%, now we're back to about 4% as we speak. So, given these uncertainties, we've added a touch of duration. For instance, right now, we're targeting around a plus 0.01 to 0.02 versus our benchmark in the short-duration 1-to-3 strategy.
Moving on to the curve, market is now pricing in a reduction of 75 basis points in the overnight Fed funds rate, as Dave mentioned. Since our last call on February 12th, when the front end curve was mostly flat, now because of the change in Fed expectations, the U.S. Treasury curve has become inverted in that three-month to two-year area.
However, while U.S. Treasury curve is inverted, the corporate credit curve pretty much saves the day and allows that, you know, the corporate credit curve to be flat, allowing the investors to lock in yields approximating the current overnight rate. Moving on with credit, investment-grade front-end spreads have been relatively well-behaved versus some of the equity vol we've recently seen.
Barclays 1-to-3 OAS is around 61 basis points, that's only about 11 basis points wider since year-end 2024. Looking at the 1-to-3 B of A indices, year-to-date financials versus industrial option-adjusted spreads have continued to grind in, and that continues to be our favorite place in corporate credit. Lastly, given the recent uncertainties in the market, we have continued to focus more on an up-in-quality focus, if you will, as triple Bs have slightly underperformed the A-to-triple As year-to-date.
We have moved to slightly increase our U.S. Treasury exposure as well as our AA and better ABS exposure. And as usual with that, I'll hand it off to Dave Ignolo.
Dave? No, thanks, David. You know, on the investment-grade side, it's, you know, this past month we've definitely seen weakness in the space.
You know, generally spreads have been, you know, 10-to-15 basis points wider from a month ago, and it really, you know, just the overhang, as Anthony mentioned, and everybody on this call has talked about, just the tariff uncertainty. And then I'd say across the board, including UBS, many investment banks have lowered their growth forecast for this quarter, you know, it seems like 1-to-1.5 seems to be the consensus view on growth across the board. And just in general, thoughts that inflation may be a little stickier as we move through, you know, the first half of this year and how that, you know, unfolds with the tariff uncertainty.
So, lowering growth expectations, the tariff uncertainty has weighed on the space, and then on top of the macro situation, we've seen a lot of supply, tremendous amount of supply the first, you know, the first quarter. We typically see a lot of supply, but we're almost $500 billion in new issuance in the first quarter. We're about $460 billion through yesterday.
But just to give a frame of reference, our forecast for the year is $1.5 trillion. So a third of it, it looks like we're getting close to it in the first quarter, and we got three more quarters to go. So, you can do the math, but the supply overhang, and then the macro uncertainty with growth and falling yields has been, you know, tough for credit to absorb in such a short manner.
So, we've underperformed a little bit from just widening from that perspective. But I will tell you that inflows into the asset class continue to be quite robust. Overall yields continue to hover around 5%.
And when you have that in conjunction with, even though growth is slowing, it's still positive. And our base case is still that, you know, slowing economic environment, but still, you know, positive economic growth and not thinking that we're moving into a recession-type scenario. But it's still very supportive for the asset class.
So, we continue to see that positive from an inflow perspective into the space. And I think that from a fundamental perspective, we still see a lot of this first quarter, I think there was like 30% to 40% of companies in the earnings call mentioned tariffs. So, as I think Anthony mentioned earlier, the uncertainty element, we don't like uncertainty and fixed income as weighed on, I think, overall cautiousness from the investor community and corporate America as this plays out.
So, we expect, you know, CapEx to probably slow down, just in general, maybe hold a little more cash on the balance sheet as things play out over the next, you know, month or so or quarter. In the second quarter, we should have definitely more clarity on some of the situation we expect. And just across the board, I think that, you know, with that, you know, fixed income from a top-down perspective, as long as we stay in that range of rates, you know, the kind of growth is still positive, as things settle down, I would expect things to start to improve again in credit and spreads would start to resume their tightened bias that we saw most of, you know, last year and the previous year.
You know, I look at this as, you know, for selected, you know, opportunities and an issue where exposure to issues, secondary market opportunities. So, we're definitely looking to take advantage of that. But I will say, from a strategy, you know, perspective, we're definitely trying to maintain a slight overweight to duration in this environment for our active intermediate strategies and also being more cautious on the cyclical sectors and sectors that might be more adversely affected by a slowdown in economic growth that we're all expecting, you know, this quarter and most likely in the second quarter.
So, real no changes on our thoughts on curve position. We still like the belly of the curve. And I think, you know, from a total return perspective, I think overall the corporate index has a total positive full return about a little over 2%, which, you know, is in this environment was pretty good when you have spreads widening, but then you have interest rates falling, you still maintain your, you know, a positive total return.
So, which I think is another reason that's keeping investors engaged and invested in the investable space. But outside of that, still favor financials, no real changes. I think M&A risk will probably slow with this increased volatility from with corporate America kind of pulling back a little bit to see how things unfold.
But in general, the tariff uncertainty is probably the number one thing that's keeping everybody a little bit cautious, because it's just, we're going to have tariffs, we're going to extend it, we're going to change it, it's just, it just wears on you. And I think a lot of people that just sit a little more cautious in terms of their investment decisions. But we're, we're taking advantage of some situations in the secondary market, as I said, in the new issue market as well.
So other sectors, you know, utility sector, we still favor that as an overweight. The energy sector, even though oil prices are falling somewhat, the balance sheets are quite strong. So we haven't really made any changes there.
We still favor the energy sector. And we're also looking to add exposure in the telecom and media sector through the new through new issue opportunities and any kind of select opportunities that present themselves in the secondary market. But overall, no change in our views still favor, you know, investment grade credit still think this is an attractive opportunity with overall yields above 5% and expectations that growth will remain kind of, even though slowing growth, but still a positive growth trajectory in 2025.
And as you know, I heard, you know, what David Walzak mentioned, you know, almost three cuts for price. And a member of six, you know, six or so weeks ago was one cut. Now three cuts.
So the market knows the Fed has that in their back pocket. If things get ugly or something happens, they can cut pretty quickly and everybody kind of knows that. So that's kind of out there still that they have ammo to cut if they need to, if things do, you know, do deteriorate quickly in the, in the, from an unemployment and a growth perspective, they can, they can move pretty quickly.
So, you know, with that, I'll pass it over to David Michael to talk about the emerging market space. Thanks, Dave. Thanks, Dave.
Overall risk tone continues to be set by rates and President Trump's tariff related headlines. This has also contributed to a rotation trade resulting in a lower U.S. rates and a weaker U.S. dollar. Over the last month, emerging market spreads were not able to keep up with the U.S.
Treasury rally of 30 to 40 basis points. EM spreads actually widened by about 18 basis points, combining the Treasury with spread returns total returns for EM over the last month was around 1% and that brings a year to date positive return of over 2% for emerging markets. Emerging market primary supply started off the year with fairly robust issuance that declined as we moved through February and again into March.
In 2025, we expect to see the same positive technical we've seen over the last few years where investors are receiving more cash from coupons and maturities than available availability of new bonds. Last week, the EU and especially Germany announced a large fiscal expansion plans led to strengthening in the euro, the rally of European equities and a sharp rise in European yields. This and the prospects of a ceasefire in Ukraine are positive for European risk as well as emerging market risk.
OPEC announced an increase in production that put pressure on oil prices, raising concerns around global demand, especially with U.S. tariffs dampening growth expectations. We're cautious in credits that are reliant on high oil prices, low oil prices, however, should lead to lower inflation pressures and improve external balances for oil importers. China has shown a resiliency to U.S. tariffs.
Tariffs are not likely a major concern for Chinese credit markets as the Chinese government remains focused on the domestic economy. Mexico showed weaker than expected investment consumption data and domestic demand is expected to remain weak. As Mexico faces high interest rates, fiscal consolidation and signs of a softening labor market and mixed in tariffs and U.S.
MCA uncertainty, the central bank has taken a more cautious approach to its easing cycle. In Panama, on the back of pressure from the U.S., Hong Kong-based Hutchison sold its stake in the ports to BlackRock or a BlackRock-led consortium for around $19 billion. This could relieve some of the pressure on Panama from the U.S.
We continue to see positive tail risks over the upcoming year. When geopolitical tensions such as Russia-Ukraine are solved, this is very positive for emerging market risk. The consensus on Trump policy implications on inflation and a strong dollar are likely to be challenged and remain volatile.
Emerging markets have remained resilient and EMFX and U.S. equity markets have reflected downside risks from uncertainty around tariffs and growth. These shifting dynamics highlight the importance of active management in emerging markets. This is an environment where idiosyncratic stories will drive performance and uncertainty from President Trump as he makes active management great again.
Now let me hand it off for an update from our multi-sector team. Thank you, Mr. Michael.
I would call it an evolving perspective on the balance of our risk budget from the multi-sector desk of late and, in a word, fairly cautious. In rates, we remain generally more constructive across our broader book of business. We added some incremental duration in recent weeks out of what amounts to respect for market action as we broke through levels lower.
The long-term remains that range-bound market, somewhat mounting evidence of a shakier economic backdrop, especially in survey data, on the one hand, but still above target inflation on the other and pair that with a Fed that's steadfast in getting inflation in check, as Mr. Walzak alluded to. 4.15 is the level of interest on the 10-year that we've tested and failed to durably breach twice now. Back in December, here again March 3rd. 4.65 is the more recent high that we saw February 12th, and it's in that general range we'd suspect rates would be apt to traffic in, but the market is still searching for that catalyst to send rates well higher from here and keep them there, and as such, we're content to own the duration that we do, believing balance of risk clearly laying more on the growth side of the ledger than the inflation side of the ledger, at least at the moment.
In the same vein, and in what's been an abundance of caution, we've slightly paired some credit risk exposure this past week, again out of prudence, instead preferring to source more of our duration budget from Treasuries versus some of the higher octane portions of our allocation from a sector end name perspective. Consider that alongside the weakening economic fundamentals that everyone here has mentioned, we've also had generally more pessimistic tone and outlook from a larger cohort of corporations in their releases, and they've, as again, prior mentioned, frequently cited economic uncertainty amidst this global trade picture. Recent releases from the airlines and retailers specifically come to mind, that was also echoed this last week by Citi and Goldman both cutting their economic as well as equity projections this last week in headlines you might have seen.
Recall demand for credit has been such a tailwind, Vigs alluded to this earlier, and that's been a huge support for spreads, the concern though would be that that slows or reverses in line with a broader risk-off appetite which would lend to further widening. That said, and interestingly, in this backup, flows have been fairly consistent still, which does speak to the appetite the investing public has for all-in yields at these levels. That said, we're still well shy of longer-run spread averages for major credit indices like U.S. investment credit and high yield, and in other words, you couldn't contend that we're extremely cheap, although we are somewhat cheaper.
Lastly, from our view, no material change in attitude as related to sector composition for the moment, at least outside of how it builds out our overall credit at-risk profile. With that, I'll turn to Lisa DiPaolo on tax-exempt municipals. Thank you very much, Patrick.
I think, Anthony, you were on point, just describing really the current climate as dizzying. If we look at the Bloomberg Municipal Bond Index, it has taken a turn from the strong monthly returns we saw last month to larger declines so far this month, just as muni rates underperformed the Treasury sell-off and bid-one-on-list climbed to $6 billion. I'd say some investors have maintained a more cautious tone, and that, along with weaker reinvestment dollars, just has translated to growing secondary offerings and just more muted appetite in general for primary issuance.
So, really, despite LIPR reporting seven consecutive positive weeks of net inflows in community funds, 872 last week alone, the market's just been challenged in general, just with heavier calendars, lighter demand, supply pressures. We have seen supplies have been elevated so far this month, about $23 billion between last week's and this week's issuance, but on the flip side, demand is spottier, and as a result, we've been seeing growing dealer balances. More recently, the front end of the curve, 10 years and in, did seem to be steadier, with longer ends turning more negative.
Today, in particular, we are seeing more general weakness in the market, and we are finally seeing some adjustments in yields shifting to higher levels. And then D, right now, they're looking, right now, proposed for today to do cuts ranging from three to seven basis points six years and in, and then six to 12 basis points out longer. So, I think at these wider levels, and just with rates rallying back, it does seem like there is some increasing interest in the market at these adjusted levels.
I'd say the best performing year of the curves we've seen to date include outperformance seen in that belly of the curve. The five-year to 10-year muni bond index right now, if you look, are the best performers year to date. And municipal valuations, we've seen some cheapening just over the past month, ratios all slightly higher, so representing similarly greater value to the investor.
Total supply in March, like I said, since some issuance last two weeks, we're looking maybe another $20 million over the next couple weeks, so about $43 to $47 billion on average. We will be watching the market's response as March springs forth, just a reverse set of technical factors with municipal supply outweighing demand, weaker redemptions, and just tax season looming. If you look back, March historically offers mixed returns, just with gains in 15 of the last 28 years.
Just more on the floater front, since that is part of our portfolio, we have seen an uptick in daily VRDN and weekly VRDN resets to like a 3.80 as we approach tax time. We usually do see these yields cheapen just as funds sell floating rate securities and raise their taxes. And we have seen some continuing normalization on the muni curve to date, flattening inside at 10 years.
But overall, there is just growing market volatility, as we know, surrounding tariff concerns, legislative proposals, and then just potential economic slowdown concerns as well, and just ongoing rate volatility. So it is still weighing on the market and investor appetite as a whole. And on our end, as we manage duration targets, we have over the past month reduced our extreme bar bill.
We have reduced some exposure in our strategies in the longer end of the curve and reallocated to some shorter areas of the curve where we feel there is opportunity to add yields without extending exposure to rate volatility and duration. So no recent changes in duration. As we get more information and clarity, such as FED posturing over the year, we will probably make appropriate adjustments across our strategies.
We have been reducing exposure as well in some weaker single A names while adding more to double A and triple A high break. And I will say on the credit side of note, the healthcare sector remains volatile as the market digests how proposed congressional reduction in federal Medicaid spending will impact credit performance. So because of that, we remain negative on the healthcare sector, and we are actively looking to reduce selective credit exposure in favor of increasing the credit quality of our portfolio.
And our expectation is that the tax exemption remains intact, although some sectors could be impacted, including higher ed, healthcare, as I spoke about, and private activities. And with that, I will hand it back over to Anthony. Great.
Lisa, thank you. A great, great, great recap of the meeting market, and there's still a lot of what to chop with with DC is again. So with that, folks, we are literally hitting the 30 minutes.
We typically have some questions, but we do need to move on to other speakers for the on-air call. So I would just say thank you all for the team tuning in and your comments, and for all of you to take the time to tune into this call. Please feel free to reach out to your regional sales director or anyone on my separately managed account investment specialist team for additional color or discussion regarding your client portfolio.
So with that, have a great day, a great rest of the week, and we'll talk to you in April. Thank you. Thank you for tuning in.
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